While the Middle East region hasn’t been affected by the global financial crisis as much as other areas, it still is not immune to downturns in the oil and gas and other industries. When the price of oil was well above $100/bbl, everyone was happy. They were less happy as it began its steady decline to below $40. However , as oil inched its way up to around $60/bbl (as of late July), drilling activity has also followed to a certain degree.

Oil companies operating in Kuwait and Oman in particular are ramping up E&P activity, including a significant steam flood project by Occidental in Oman. By the end of 2009, Kuwait Oil Company (KOC) expects to at least double the number of rigs it operates. Drilling contractors and service companies, of course, are happy to support the operators’ increasing activity. These companies include Ensign Energy Services, Kuwait Drilling Company (KDC), Burgan (Hamid Al Hamid), Nabors and Sinopec, all of which were awarded contracts to provide mostly newbuild rigs for drilling in Kuwait and Oman.

DOUBLING OIL OUTPUTKOC’s plans are to increase its oil production to about 4 million bbl/day by 2020 from approximately 2.14 million bbl/day early this year. In 2008, the company issued tenders calling for 27 rigs, essentially doubling the number of rigs it operates. Several of those tenders materialized into firm contracts this year.

Among them are five medium-sized rigs awarded to Sinopec – three 1,500-hp units and two 1,000-hp rigs. These mark the Chinese company’s first foray into Kuwait as a drilling contractor. Deliveries are set to begin by the end of this year. The five-year contract is reported to be worth about $400 million.

These rigs will work for KOC’s development group, which is responsible for the shallow- to medium-depth wells to around 12,000 ft. The group primarily uses rigs in the 550- to 1,500-hp range, with some 2,000-hp rigs.

KOC’s deep drilling group initially began with two teams in February 2002 under the exploration group umbrella. In 2008, the deep drilling group and its two teams were established as a separate entity.

Kuwait Oil Company is contracting Kuwait Drilling Company’s Rig 15, shown here working on development well MN-132 in the Minagish field in West Kuwait.

“There initially were two rigs for each team,” said David McKinnell with TOTAL, which works with KOC under a technical assistance agreement. “The number of rigs increased to three, and that number was doubled to six rigs for each team.”

The group presently has four operational teams and one engineering team. A fifth operational team will be added to operate four newbuild workover rigs scheduled for delivery during 2011. The deep workover rigs will feature 1,500 hp with a 15,000-psi BOP and choke manifold for high pressures.

KDC, Burgan, and Nabors are all supplying rigs to the deep drilling teams. All are 3,000-hp rigs with drilling depth ratings from 16,000-30,000 ft. Nabors’ rigs are its first in the country, according to Mr McKinnell.

The rigs are used for deep exploration, greater than 20,000 ft for gas prospects. In the North Kuwait gas project, the rigs drill exploration and delineation wells to 16,000 ft and greater. KOC also uses the rigs for drilling light-oil producers in the west, south and east regions of the country. These wells are drilled to the high-pressure reservoirs and prospects in the Jurassic formation and deeper. The basic drilling program consists of seven casing strings, necessary due to the complex lithologies and pressure trends encountered.

The 13 ½-in. casing is set to the Hith formation, with three casing strings (10 ¾-in., 7 7/8-in. and a 5-in. liner) below the 13 ½-in. casing.

“The Hith is kind of the junction between cretaceous and Jurassic,” Mr McKinnell explained. “Below that there is a 1,000-ft salt dome where the pressures really ramp up through the salt and begin to subside on the other side of the salt.”

“We have one set of reservoir zones at a higher pressure than the other, which is why we use the 7 5/8-in. and 5-in. casing below the salt.”

Each rig drills on average two deep wells per year. Seventy wells are planned for the North Kuwait gas development project. Each well is expected to average 15 MMcf/day of gas and 5,000 bbl/day of light oil, he said.

To help accomplish the major drilling project, KOC plans to increase the number of its rigs in its deep drilling group from 12 to 17 by mid-2011, not including the four new workover rigs being tendered. Additionally, plans are under consideration for a new 4,000-hp rig for deep-gas exploration, plus a jackup rig for offshore prospects.

“It’s in the feasibility phase now regarding a jackup to drill in Kuwait Bay,” Mr McKinnell said. “We are thinking about a jackup because it needs to have the same specifications as the land rigs, such as 3,000 hp and 15,000-psi BOP.”

REGIONAL E&PDrilling contractors and service companies view the increasing Kuwait E&P activity as sustainable, at least for the next five years, providing the right business environment for companies to grow.

For example, KDC has already dramatically increased its onshore fleet and has additional growth in the works. Another company, Arabian Energy Services (AES), was formed in 2008 to provide a complete range of drilling, workover services and rental tools to the region through various partnerships and acquisitions.

“We have grown dramatically during 2008 and early 2009,” said Sulaiman Al-Musallam, technical manager for KDC. “We have 18 rigs now, which is about 200% growth, and we have five more new rigs coming.”

The new rigs will be delivered during 2009 and 2010, all with firm drilling commitments. “We have been told that we were awarded a tender for two more rigs and possibly will participate in another two rigs, each of which are 3,000-hp units,” Mr Musallam said.

In addition to Kuwait, KDC operates one rig in Libya and two rigs for Chevron in the divided zone between Kuwait and Saudi Arabia. Also, the company has been approached by Chevron to work in Iraq, according to Mr Musallam. “If things become a little more favorable, I think we might consider that,” he said.

Mr Musallam noted that KDC definitely is interested in the prospect of providing a jackup for KOC in the future.

“The financial crisis has affected the oil markets,” said Meshal Al-Ghanim, assistant vice president, operations, for AES. “But I think there will be an expansion of (E&P) activity now that oil prices have risen to about $60 or higher.

“The higher price means the projects are back to the economical phase they were meant to be.”

Burgan Drilling’s Rig 124 is drilling exploration well AR-1 in the Arifjan prospect in southeast Kuwait.

Mr Ghanim said he believes workovers and well interventions in the Middle East have not been as affected by lower oil prices as much as in other areas since the resource is owned by national oil companies, which seek to maximize their production. This is in contrast to operators who work under production sharing agreements with various governments, he said, who mainly seek to develop as much new oil as possible.

AES is owned by ZAHRA Group Holding, the founder of Kuwait Energy Company. AES’ business model includes entering alliances with companies with technical expertise in order to create joint ventures to provide drilling services, well management services and rental tool services in the Middle East, North Africa and Southeast Asia. The company believes there is a strong and sustainable demand for oilfield services, with continuing demand providing access to new players. The company plans to pursue acquisitions to obtain controlling shares in oilfield service companies to create value, including acquiring drilling rigs for the purpose of entering into long-term drilling contracts.

AES is not active in Kuwait, focusing primarily on Oman, Yemen, Iraq and Egypt. “We will open our first branch in Oman in July or August 2009, and then we will try to acquire two or three companies that own drilling rig services and drilling equipment, and service companies,” Mr Ghanim said.

“We are not going to be establishing a new service company with a new name,” he continued. “What we are trying to do is acquire a company and change it to be an AES company while continuing to provide the same services.”

AES’ plan to pursue operations initially in Oman may be a good strategy as E&P activity there appears to be increasing. For example, Ensign, which has worked in Oman continuously for more than 20 years, recently provided five of its Automated Drilling Rigs (ADR) for long-term contracts for an 840-well drilling program.

Those rigs joined three Ensign rigs already in the country. This drilling program will include vertical injector wells, horizontal producers and re-entries of existing wells for completion in horizontal sections.

Ensign is providing the five new ADR rigs under long-term contract to Occidental in Oman for a steam flood project. Oxy’s ADR rigs range from 500-750 hp and are capable of drilling to 9,000-10,000 ft. Oxy’s rigs, built in Nisku, Alberta, Canada, and shipped to Oman via Houston, are coiled tubing-capable. They can move in four to five loads and be rigged up at the next well site within a couple of hours.

Oxy will utilize the rigs at its Mukhaizna field in south-central Oman, where it has implemented an aggressive drilling and development program, including a major pattern steam flood project for enhanced oil recovery. At the end of 2008, gross daily production in the Mukhaizna field was over six times higher than the production rate in September 2005, when Oxy assumed operations of the field.

The company plans to steadily increase production through continued expansion of the project.

Despite the recent project for Oxy in Oman, Ed Kautz, executive vice president USA & international operations for Ensign, noted a softening of activity in the Middle East. “Activity has dropped off in Oman and Libya,” he said. “However, they haven’t been as affected as, say, Canada and the US because of the lead time to get their prospects up and running.

“Some of these operators are looking so far ahead that they can’t turn back.”

That’s the case with Oxy. “We have been working on his project (for Oxy) for probably a year and a half to two years,” Mr Kautz said. “By the time the downturn began, we probably were 90%-95% complete on the rigs.”

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